Vikas WSP – Wish to bet on a wonder seed ?

The Company Vikas WSP Limited was established in 1998. The Hindi word “ Vikas” means development"WSP Stands for "Water Soluble Polymers"

The Company is one of India's foremost guar gum powder (GGP) manufacturer, supplying to all sectors of the food industry with an extensive range of quality products. Besides food, the company also offers guar gum for technical applications such as pet food, oil drilling , textile printing, mining paper, etc. Annual production Capacity of all grades of guar gum powder is 39900 MT. The company is committed to provide better products in a timely and efficient manner.

Warren Buffet advocates that you should buy a company whose business model you need to understand. So, lets take a quick look at what exactly is guar gum and who on earth needs this stuff.

Guar gum, also called guaran, is a gal actomannan. Galactomannans are often used in food products to increase the viscosity of the water phase. Guar gum is extracted from the guar bean, where it acts as a food and water store. The guar bean is principally grown in India and Pakistan, with smaller crops grown in the U.S., Australia, China and Africa. India accounts for about 80 percent of the global trade in guar products and Vikas WSP Ltd is the undisputed listed leader in this field.

The gum is derived from the albumin of guar seed (Cyamopsis tetragonolobus), an arid zone legume that grows in Gujarat and Haryana, but mainly in Rajasthan. It is a hydrocolloidal polysaccharide or a water-absorbing carbohydrate consisting of galactose and mannose molecules. The gum has amazing gelling properties. Its thickening power is 6-10 times that of starch.
Guar gum is used as a binding, thickening, film forming and lubricating agent. Broadly, the end use of guar gum is as under:

• More than half of the demand is industrial where it is used for recovering oil from low-yielding wells; for extraction of minerals, mainly uranium; for production of explosives (it dissolves in glycols and alcohol); for textile and carpet printing; for paper making; fire-fighting and water treatment.

• About 35 percent of the demand is food related: bakery products, frozen foods, instant mixes and ice creams, noodles, beverages, pastes and pet foods.

• Five percent of the consumption, and a growing one at that, is from the pharmaceutical industry for laxatives, slimming aids, diabetic treatment, tablet preparations and ointments.

• Another 5 percent of demand comes from hair-setting solutions, shampoos, soaps, lipsticks and mosquito coils.

With an Equity base of Rs. 13 crores and a very negligible Debt Equity ratio, Vikas WSP will soon cross Rs.500 crores turnover mark in fiscal 2010-11. Net Sales and PAT in fiscal 2009-10 was Rs. 458 crores and Rs.123 crores respectively thereby yielding PAT Margin of 31 per cent. The corresponding figures for the previous fiscal 2009-10, was Rs.365 crores and Rs.121 crores respectively.

While the Net Profits grew at a CARG of roughly 20 per cent in a span of 5 years, the Gross Fixed Assets which stood at Rs.168 crores as on 31 March2006 increased by CARG of roughly 31 per cent to touch Rs.669 crores as on 31 March 2009. Should we think twice that the net profit margins are too good to be true ? I think not.

In fact, Vikas WSP claims higher profitability mainly because of its ability to procure guar seed cheaper than its rivals. Farmers prefer to sell cheap because there is no factory except that of Vikas WSP in Shri Ganganagar, which is 500 kilometres from Jodhpur

The only matter of concern is the 14.8 per cent holding of the promoters. After all, you need to be a super human being to allow higher public participation in a company which churns out roughly 30 + per cent net profit margins! Of course, you can’t compare a Vikas with Infy but Infosy’s, if I am not mistaken has promoters holding of just 16.05 per cent. And everybody knows about the shareholding pattern of one of the most professional companies in our country, namely Larsen & Toubro.

Very recently, Vikas WSP is expected to execute a technical collaboration-cum-investment agreement with its overseas customer (oil/gas servicing company) for the manufacture of speciality chemicals of American Petroleum Institute (API) standards used in the oil drilling and fracturing process. Currently, these chemicals are manufactured in the US alone and used by the oil servicing companies worldwide.

Vikas WSP seems to be a lovely bear to hug in a market full of bulls – what with a PE of 2.7, a EV/EBITDA of 0.97 and a Price/BV of 0.17! But do let loose the bear once you have achieved your pre-set profit targets. Will aiming for a profit target of 60 to 100 per cent in a years’ time be asking for too much. I don’t think so. At times, we need to muster the courage to go where the angels fear to tread and give your self a good treat once in a way. After all the markets are getting heated by the day and in such a scenario not even best in class companies can give you such returns.

So the next time when you are enjoying eating your ice cream, pudding, canned sauces or taking a diet pill designed to create a sense of fullness, make no mistake that it will have the properties of the wonder stuff called “gum guar.” Enjoy the good things of life and keep investing intelligently and patiently to enjoy better things in life.

Happy Investing.


Kishor S. Khot, [Kishor@hbjcapital.com], Equity Strategist, HBJ Capital Services Pvt Ltd